A “close corporation” is a special sort of privately held corporation which has only a few shareholders, generally individuals.  Both  C-corporations and S-corporations can be close corporations, but the shareholders must affirmatively elect to be a close corporation by entering into a written agreement to that effect. This Close Corporation Agreement allows the business and its shareholders to bypass many of the formalities more approproriate for larger companies.

In Ohio, a Close Corporation Agreement must affirmatively mention that that it is being adopted pursuant to Ohio Rev. Code 1701.591.  In addition, it must be signed by ALL of the shareholders; if additional shareholders are later admitted, they should also sign the Close Corporation Agreement, but are bound even if they do not sign the Close Corporation Agreement.  There also needs to be minutes of a shareholder meeting adopting the Close Corporation Agreement. 

Contents of Close Corporation Agreement.  So what’s the point and what should be in this Agreement?  The point is that without a Close Corporation Agreement, a small company with perhaps three or four individual shareholders would have to keep the same sort of formal records of director and shareholder meetings as large public corporations.  In addition, a Close Corporation Agreement can address other important issues such as what happens if one of the shareholders wants or needs to leave, how dividends should be distributed, and how the company’s business or financial affairs of the company should  be made.  Ohio Rev. Code 1701.591 lists the following by way of example of what the Close Corporation Agreement might include:

  • Regulation of the management of the business and affairs of the corporation
  • Rights to dissolve the corporation at will or upon the happening of a specified event
  • Requirement to vote certain shares a particular way
  • Requiring unanimous votes of all shareholders on specified issues
  • Designation of company officers or directors
  • Give authority to any individual holding more than one corporate office to execute, acknowledge, or certify in more than one capacity any instrument required to be executed, acknowledged, or certified
  • Terms and conditions of employment for company officers or employees
  • Provisions about the declaration and payment of dividends or distributions or the division of profits
  • Elimination of board of directors or restrictions on their authority or delegation of a portion of the authority of the board of directors to particular shareholders
  • Granting absolute right — without the necessity of stating any purpose – to examine company’s books and records   
  • Prohibition, or restrictions upon, issuance of additional shares of stock based upon a specified affirmative or unanimous vote of shareholders or unless other specified terms, conditions, or events occur
  • Arbitration or other provisions in case of shareholder deadlock
  • Dispensing with annual meeting unless specifically requested by a shareholder

If a Close Corporation Agreement eliminates the board of directors, then the shareholders are deemed directors for purposes of Ohio law unless a particular shareholder is not permitted to vote on a particular matter under the Close Corporation Agreement.

Change or Termination.  Once adopted, a Close Corporation Agreement can be changed upon the affirmative vote of the parties to the Close Corporation Agreement as specified in that Close Corporation Agreement, but no less than four-fifths of the outstanding shares of each class; shareholders can decide that a uanimous vote is necessary.  It also automatically terminates if shares are registered or listed on a national securities exchange.

In addition, a Close Corporation Agreement will terminate if shares subject to it are transferred to someone with no knowledge of the Close Corporation Agreement who then gives notice of rejection of the Close Corporation Agreement within the earlier of (A) ninety days after receiving notice of the existence of the Close Corporation Agreement or (B) three years after the transfer of the shares; UNLESS the company offers to buy the shares for the amount paid for them.  To prevent inadvertent termination of the Close Corporation Agreement in this way, it is important to put a legend on the shares that they are subject to the Close Corporation Agreement.